November 06, 2012

Conversations with Doug Casey on the Election of 2012

[Editor's
Note: Your editor, Louis James, caught up with Doug Casey backstage at the
New Orleans Investment Conference, where we both had just given talks.]

L: Doug, I know you're no
fan of either presidential candidate - a pox on both their houses - but we got
more questions today about what would happen to our investments if one or the
other would win than just about anything else. So, what do you think - does it
matter? Should we play things differently, depending on which one wins?

Doug: Well, I have to first say
that I'm the worst US political handicapper ever. I don't have my finger on the
pulse of hoi polloi
in the barrios, ghettos, and trailer parks. Nor do I claim to know what
Gen-Xers in the city are thinking, nor what passes for the white middle class
in the suburbs, nor the oldsters in their retirement homes. I'm not a political
animal. The only US presidential election I ever called right was the last one;
I thought Obama would win. But then, in New Orleans, I was chatting with James
Carville - who definitely is a political animal - and he doesn't know either.

That said, my gut feeling is that Obama is
going to win again. That's partly because the incumbent always has the
advantage, and partly because the mainstream media - which is where most people
both get their information about what's happening in the world and how to
interpret it - seem to overwhelmingly favor Obama.

L: I thought you didn't like
making predictions...

Doug: I don't, but purely for
entertainment purposes, I'll stick my neck out and predict an Obama win.
Perhaps a deeper reason for this is that the electorate itself has become
corrupted - even more than they were four years ago.

L: When more than half of
voters receive some kind of government subsidy or another, they can always be
counted upon to vote for more government largess, and the game is essentially
over?

Doug: It's a serious problem of
mass psychology. Most people today think that whenever there's a problem, it's
the government's job to "do something" about it. Obama is - at least
as far as his rhetoric goes - much more activist about "doing things"
than Romney. On the other hand, all politicians are enthusiastic and skilled
liars. So Romney might go wild with social programs, all the while saying
something idiotic about trying to save capitalism.

L: People are afraid and one
paycheck away from being evicted, and Obama's the one promising two chickens in
every pot.

Doug: Exactly. The election of
1932 is noteworthy in that context: a time of economic crisis, depression, and
politicians promising "bold measures." The key is that the Depression
unfolded on Hoover's watch, so he gets the blame. But he actually does deserve
a lot of blame. If he'd cut taxes and spending radically and deregulated, it
would have been a short readjustment, like the 1921 depression after World War
I. He did the opposite. In point of fact, Hoover started many socialist
programs along the lines of the New Deal programs FDR later became famous for.
The Hoover Dam, for instance, was a major public-works project such as the
Public Works Administration would later undertake, meant to create jobs. He
also increased the top income-tax bracket from 25% to 63%.

Most people don't know this, but Roosevelt ...

L: ...campaigned against
such measures.

Doug: Yes, he campaigned on a
free-market platform that seemed to offer hope that he would do the right
things; and then, once in office, he turned around and did the exact opposite.
He raised the top tax rate even further, first to 79%, then 81%, then 88% - and
with that last one, in the middle of World War II, he dropped the income level
it applied to from $5 million to $200,000. Contrary to popular belief, this did
not get the US out of the Great Depression, but made things worse. The only
reason he's regarded as a hero today is that he had the singular good luck to
enter office in 1933 - when the worst part of the Depression was over. But he
did make it worse, and people still think Roosevelt's programs helped, and most
people believe it was the war that ended the Depression. In fact, real recovery
didn't begin until after the war.

L: Flash forward to today.
If things are similar, that would make Obama the incumbent with the socialist
track record, and Romney today's FDR. Romney's the one people see as a
businessman who knows how to do things to help the economy - even though as
governor, he implemented a socialized medicine program
before Obama tried to.

Doug: The problem is that the
US hasn't really had a liquidation of malinvestment as it did from 1929 to
1933. So I think whoever is elected now is going to get blamed. Romney is an
empty suit. He's said that he doesn't plan to cut welfare, wants to spend much
more on the military, and he has other spending proposals that make him nothing
more than Obama-light. This is actually what Republicans have almost always
done, because most have no principles - certainly none in modern times.

L: So what happens if Romney
wins? A lot of people seem to believe it will make a huge difference.

Doug: Well, he might be better
for taxpayers in the short term; but, for the long run, it would be very
unfortunate if Romney wins. That's because he would be associated with
free-market economics, as Republicans almost always are. A real pity. The
social and economic disaster that's looming over the next four years would
incorrectly be blamed on capitalism.

I'm convinced the Greater Depression has
started. We've gone through the leading half of the storm. Obama
got the eye of the storm, and now we're headed into the trailing edge of the
storm, which is going to be even worse than what we saw in 2008-2009.

L: It'd be just as the Great
Depression, which resulted from government interference in the economy, is
usually blamed on the "unrestrained laissez-faire
capitalism" of the 19th and early 20th centuries.

Doug: Exactly. And if two Great
Depressions were seen to be caused by free enterprise, that would deeply
entrench a highly destructive error and have long-lasting consequences. From a
long-term point of view - if you care about posterity - it's actually better if
Obama wins. Then socialist-style ideas might get more of the blame for the
train wreck.

On the other hand, the continuing global
economic crisis (and much worse to come) would be a great excuse for Obama to
open the floodgates on all kinds of really, really stupid ideas.

L: As a second-term
president with no possibility of re-election to worry about, he could go wild,
no holds barred.

Doug: Yes. He'd have time and a
free hand to firmly entrench many seriously bad ideas in Washington. And once a
new program gets its own bureaucracy, with its own buildings, it's impossible
to get rid of. Lenin was right when he said, "The worse it gets, the
better it gets."

L: So we're damned either
way?

Doug: I'm afraid so. I've said
it before: there's no way out but through the wringer. We get a deepening of
the Greater Depression regardless of who wins. If Romney wins, it gets blamed
on capitalism, which would be a long-term disaster. But if Obama wins, we'll
get a Krugman-Stiglitz wet-dream of a government. That would be a complete
near-term disaster.

L: So if I had terminal
cancer and I voted, Romney would be my man?

Doug: Maybe, if you didn't
think you'd last more than a year or so. You'd likely get to keep more of your
money while you lived. But there's another important difference: the federal
bureaucracy is now thoroughly populated with Obama's apparatchiks. Romney
couldn't save the US from the Greater Depression, even if he were a real
free-marketeer - which he most assuredly isn't. But he could expunge a lot of
those poisonous parasites, replacing them with his own crew. We'd still have
just as many parasites, but perhaps of a slightly less toxic variety. And even
if they were just as bad, they'd still take a while to get going, so there'd be
a reprieve for that time, at least.

L: You're absolutely sure
there's no way Romney could save the day - even if he revealed himself to be a
Ron Paul clone, once he got into the White House?

Doug: No. The state itself has
too much momentum in the wrong direction now. As I've pointed out before, any serious
changes would result in a talking-to by the heads of the various Praetorian
agencies. If he survived that, the Supreme Court would strike down most of what
he did, and the Congress would legislate against it. And the people would riot,
as if they were Greeks. As you pointed out, when the people realize that they
can vote themselves free lunches rather than work for them, a democracy is
doomed.

L: Who was it who called
democracy "an advance auction on stolen goods?"

Doug: H. L. Mencken, a genius -
one of my favorites. But what he actually said was that "every election in
a democracy is an advance auction on stolen goods." We covered the
futility of trying to get the "right" person elected in our conversation on Ron Paul.
The state is corrupt, the politicians are corrupt, and the final straw, the
electorate is corrupt. There's no way out but through the storm.

L: Famous last words.

Doug: I know, but that's the
way I see it. It's as with Wile E. Coyote. He runs off a cliff, and you
logically think he's going to fall right away. But he doesn't - his feet keep
windmilling in the air, and the law of gravity doesn't kick in until long after
he should have dropped. The US now resembles nothing more than a hapless
cartoon character.

In essence, the things we think must happen usually take much
longer than we imagine possible. But once they start, they usually happen much faster than we imagine
possible.

But I'll go out on a limb again and say that
I'm reasonably certain the economic house of cards that the US and other
governments have been propping up since 2007 will collapse not just within the
next four years, but likely in 2013 and 2014. It's happening in Europe now -
they really have reached the end of their rope. It'll happen shortly in Japan
as well, the most indebted society in the world. It''s going to happen in
China. And that's going to bring down the resource-oriented countries - Brazil,
Australia, South Africa, Canada, Russia. It's going to be a worldwide
cataclysm.

This whole debt issue, by the way, is
critical. As I've said numerous times, you get wealthy by producing more than
you consume and saving the difference. The opposite, consuming more than you
produce, results in the depletion of wealth, either as savings are drawn down
or debt is accumulated. You're either destroying the productive capacity of
past accumulations of capital or mortgaging the productive capacity of future
accumulations of capital. Either is bad economics, whether for a household or a
country; and we're seeing both - and will continue to see both, regardless of
who wins the next US election.

With the idiots who run the world's central
banks doing their best to keep interest rates at near zero - actually severely
negative in real terms - they're discouraging saving and encouraging even more
debt.

There are no political solutions. The economic
problems are bigger than any politician. There's no way out. I pity the poor
fool who wins this election.

L: Let's look at the short
term again. If Romney wins and lots of investors think he'll "fix"
the economy, there could be a surge in the stock market based on nothing more
than expectations. On the other hand, if Obama wins and investors expect higher
taxes, they could sell in advance of that happening - people are talking about
"tax-gain selling" this year in addition to tax-loss selling.

Doug: I really don't think any
of that matters. People think the economy rests on a base of psychology, but
they are wrong. What makes an economy work is not confidence and not
consumption, but production. What makes an economy grow is savings -
accumulation of production in excess of consumption that can be invested in new
things.

If Romney wins, people start spending on
consumption again because they're confident, but that's not a good thing. What
needs to happen is for past mistakes to be fully and truly liquidated, and the
economy needs to be freed so that people can produce more, consume less, and
save. Then we can build a real solid foundation for future growth. All the
conventional hack economists, however, believe that the banks should lend more
to enable people to consume more, and that will stimulate production. That's
going to make things worse. It will be production catering to unsustainable
patterns of consumption - further exacerbating the problem, which is that the
US and many countries have been living way above their means for a long time.

L: I agree, but economic
fundamentals are subject to transient headwinds and tailwinds. A lot of
investors - including many gold bugs - think that if Romney wins, he'll be good
for the economy, and that will make people less fearful, and that will reduce
gold's luster as a safe haven. The driving reality is the trillions of currency
units that governments around the world have created - an interesting side note
is the recent all-time-high that gold reached
in euros - but prices are fixed at the margins. Very near term,
even incorrect expectations could impact prices, could they not?

Doug: I think it's a mistake to
try to predict mass psychology on a short-term basis like this. Too volatile. A
bad day on American Idol
could change things drastically.

But here's how I read it. Romney is a not
particularly thoughtful pragmatist with no real principles. If he wins, he'll
probably implement just as many wrong-headed socialist ideas as Obama would,
varying only in their details and pet interests, not in their essential nature.
Just like Obama, he's going to try to use the government to fix the economy, and
that's the exact opposite of what needs to be done; the government needs to get
out of the way and let economic activity go where it will. He'll "do
something." He'll just tart up his actions with different rhetoric.

So things are going to get much worse whoever
wins, and if it's Romney, it's more likely that he'll resort to military
adventurism to "wag the dog"
more quickly. Obama has continued the war in Afghanistan and likes to take
credit for the extrajudicial killing of Osama Bin Laden - he's so drone-happy,
I almost wonder if he's the president who'll activate Skynet - but
Romney is clearly the more hawkish of the two, and that's one of the worst
things about him.

Doug: Well, if you insist on
voting, consider pulling the lever for Gary Johnson, the ex-governor of New
Mexico, on the Libertarian ticket. The die is cast for the next few years. The
US deficit will continue ballooning and the Fed will keep printing up dollars,
regardless of who wins. But if you care about the consequences of this
election, the main consequence to consider is the impact on the next round in
2016 - assuming the US still has elections by then.

Things will be so bad in the next few years,
people will be looking for something different. They'll have no hope, and
they'll want serious, radical change. If Romney wins, the Democrats will take
the White House in 2016 for sure, and that will likely mean Hillary. She's
perhaps the most dangerous Democrat possible, a real-life version of Dickens' Madame
LaFarge, or perhaps a reincarnation of Evita Peron. About the worst person I
could think of to ever become president. She would totally wipe out whatever
little is left of America by then.

On the other hand, if Obama wins, the
Republicans will probably win in 2016. By then, things will be such a mess, so
chaotic, it will be time for a general to step into the ring. People in the US
love their military now - a strange thing to see for someone who remembers how
hated the military was during the Viet Nam war. No one would have dreamed of
voting for a general back then. But now, a right-wing general who's perceived
as being decisive and incorruptible could play the role of the "man on a
tall white horse" who can lead the nation forward. And that would not only
increase the chances of more stupid, wasteful wars, it could really turn the US
into a true police state. He'd treat the country like a military camp.

L: If we're damned if we do
and damned if we don't, what's a person to do?

Doug: The only thing to do is
to stop thinking politically. Stop looking for political solutions to
socioeconomic problems; political solutions are poisonous, certainly at this
point. The political system is terminally corrupt - it needs to be flushed.

Look to take care of yourself first. If you're
not in a strong, stable position, you won't be able to help your family,
friends, and others you care about. As cold-hearted as it may sound, the right
thing to do in a period of social disintegration and economic collapse is to
look out for #1. Make sure you're not a liability to yourself and others.
Charity begins at home - that's the first order of business.

Second, after you're secure, look out for your
friends and family - at least the ones who will listen and you can move to take
action in a sensible direction. This is the best thing you can do for them, but
it's also a selfish thing to do for yourself; you'll need all the allies you
can get, going forward into turbulent times.

If you have time and energy left from that,
you can start looking into what influence you can have on the larger world.
Which is to say, only at that point can you afford to think politically. But
that's pretty far down on the hierarchy of importance these days.

L: Investment implications. Is
there no "Obama play" or Romney play" - some trade you might
rush out and implement depending on who wins?

Doug: No. The only certainty I
see is increased financial chaos. An argument can be made for catastrophic
deflation, but I believe we'll see the opposite. The Fed has promised a minimum
of $40 billion a month in new liquidity. And at some point the banks, which are
generally not lending much, will start doing so. When all the cash they are
sitting on starts flooding into the economy, we'll see inflation in earnest and
interest rates of 10%, 20%, even 30%, just like in a banana republic. That's
going to trash the US dollar. And since most savers save in dollars, that's
going to wipe out the productive class, worldwide.

Furthermore, as we've pointed out before,
there's a super-bubble in government bonds. I call them a triple threat to your
wealth: interest rate risk, credit risk, and currency risk. Rick Rule has taken
to calling them "reward-free risk." Just as the tech bubble burst in
2000, and then the real-estate bubble burst, the next one is the bond bubble,
with immense destruction of capital.

I continue to say that, as impossible as it
sounds, that all markets are overpriced. There is simply nothing in the whole
world - not stocks, not bonds, not real estate - nothing that I can say without
qualifications is cheap. So, with everything riding high, you've got to
continue accumulating gold and silver to protect yourself from financial chaos,
and you've got to diversify yourself internationally to protect yourself from
government chaos. To speculate, of course, there are the gold stocks. They're a
leveraged bet on government continuing to do the wrong things.

I've said it before and I'll say it again: the
governments of the world consider people to be their property. Right now, they
see their subjects as milk cows, but when things get really rough, they might
see them as beef cows.

L: The end is nigh. Good
thing you're an optimist.

Doug: [Chuckles] We should make
sure new readers understand that you're not just being sarcastic. I do think
things will get even worse than I think they will, but I also believe they will
subsequently get even better than I can imagine them being, thanks to the
longest trend of them all, the Ascent of Man.